Marx, Keynes and the Note Issue.

Marx and the Note Issue

For Marx the key factor determining changes in the general level of prices is the amount of “money” (notes and coins) in circulation in relation to the amount needed in given conditions of production and trade.

Writing about Britain in which the government, through the Bank of England, controls the issue of notes and coin, Marx showed that the government can adopt one or other of three policies: push more currency into circulation and raise the general price level – inflation; keep the amount of currency under control – a relative stable price level as in the century before 1914; or reduce the amount of currency in circulation and so bring down prices – deflation.

Marx set out his theory of inflation in CAPITAL, VOLUME 1, Chapter III, section 2. He based it on his law of value and he use as his illustration the gold standard as it existed in Britain at the time.

Marx wrote:

If the quantity of paper issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one quarter of an ounce…the values previously expressed will now be expressed by the price £2 (Allen and Unwin edition p. 108).

Several qualifying factors need to be taken into account

Modern economists, both the Keynesians and the Monetarists, and the Treasury and the Bank of England use the term “money supply”, but they do not mean what Marx meant by money. For them “money supply” is predominantly bank deposits. They all reject the idea that notes and coins are a governing factor in determining the price level.

A stable price level, as it existed from 1850 to 1914, does not mean any price change at all. Prices rise moderately in booms and fall in depressions. Further, the “needed” amount of currency rises with growth of population and production and falls with monetary developments such as the growth of the banking system (to which Marx drew attention) and later on the use of credit cards and the like. So Marx never subscribed to the theory that every change in the amount of currency produces an equal change in prices.

Keynes and the Note Issue

Keynes did not advocate the kind of continuous and massive inflation that has taken place since the end of the Second World War. Had he lived he would no doubt have repudiated what was done in his name.

What Keynes did advocate was that in a situation of falling trade when capitalists have to cut their costs, trade unions would resist any reduction of money wages.

So he advocated a short period of inflation, on the assumption that workers would tolerate some rise of prices without pressing for higher wages.

Keynes in the 1920’s completely understood and accepted the Marxist view that an excess issue of an inconvertible paper currency puts up prices. There appears no evidence that he changed his mind.

What he did hold was that there is no need to have formal control over the note issue, provided that the Government controlled “credit”.

Keynesianism and the degeneration of economics

A basic fallacy of the Keynesians is that they do not face up to the fact that the government cannot increase government expenditure (which Keynes advocated as a means of securing expansion of the economy) without getting the money from somewhere.

A question Marxists have asked Keynesians is where the addition government revenue is to come from. We have received several different answers.

The first is that it comes from increased taxation. But obviously if you raise more money by taxation it enables the government to spend more but reduces the spending power of the capitalists who have to pay the increased taxes.

The second is by selling Government Securities to Investors. But this also reduces the ability of the investors to spend (just like increased taxation).

The third is to borrow from the Banks by selling treasury bills. But to pay for the treasury bills the banks have to call in loans they have made to the money market. The money market has a traditional “right” to go to the Bank of England and borrow from the Bank of England.

Remember that when the Government borrows from the banks it spends the money, thus increasing the bank balances of companies and individuals (unlike what happens when the Government increases taxation and spends the money.

Some of these increased bank balances are withdrawn from the Bank of England in cash, so the bank correspondingly prints more notes to meet the increased demand.

So it ends up with an increased note issue.

It is just the same as if a Government cuts out the intervening stage of borrowing from the banks and directly prints more notes and spends them.

All additions to the note issue are credited to government accounts at the Bank of England. It is a form of non-tax Government revenue which cuts only the cost of printing the notes.

The Monetarists

It is a basic principle of the monetarists that they flatly deny that printing mere notes has any effect whatever on prices (unlike Keynes).

When monetarists say “we are not printing money” they do not mean “not printing notes” (which they believe has no effect on prices). Of course they are wrong.

They mean “not selling Treasury Bills to the Banks” which they do think affects prices. The various definitions of what constitutes money for the Monetarists defined as M1, M2 and M3 (bank deposits, commercial paper, bank acceptances, bonds and so on) has nothing to do with Marx’s definition of money which is linked back to the necessary labour time it takes to produce gold. Economists cannot abolish the law of value.

Marx was not an advocate of the quantity theory of money any more than he was a Monetarist.

This did not stop Professor Milton Friedman believing Marx to be a Monetarist. He once stated: “let me inform you that among my fellow Monetarist was Karl Marx” (OBSERVER 26th September 1982). Apparently he even told the former British Prime Minister, Margaret Thatcher this was so, although he gave no evidence and her reaction to being told that Karl Marx was “one of us” was not recorded.

The Monetarists do not work within the scientific framework of a labour theory of value but Marx does.

If the government raises all its revenue by taxation (a balanced budget) the mechanism through which additional notes get into circulation ceases because the Government then does not need to borrow from the Banks.

What about Quantative Easing?

A recent policy pursued by Central bankers is quantitative easing (QE). If QE works businesses should find it easier to get credit increasing production and reducing unemployment. In Britain, the first programme of QI begun in 2009 under the Labour Government did not see an increased level of lending to borrowers as its proponents hoped while unemployment actually increased.

In October 2011 the Bank of England began a second round of Quantitative Easing. With quantative easing the Bank of England electronically buys government bonds and debt from existing holders; banks, insurance companies and pension funds. This, the theory states, will allow banks and financial institutions to liquidise assets and lend to small and large businesses, which in turn, will then reinvest in plant and labour improving the performance of the economy and end the current economic depression. Results from the US show that the use of QI is mistakenly optimistic.

The United States Federal Reserve undertook a programme of quantitative easing In autumn 2008 along with other central banks around the world, as part of their efforts to keep stabilise the financial and banking system and improve the economic performance of the economy. Despite the use of quantitative easing, the US economy is still in depression with high levels of unemployment (9.1% in October 2010) forcing the Obama administration in desperation to embark on $450bn worth of government spending; merely a repetition of previously failed Keynesian policies.

Opponents of QI claim that it is inflationary. One test for this assertion is to look at what impact quantitative easing has had on the US inflation rate. In 2007, the year before quantitative easing (QE) took place, the inflation rate in the US was 2.85%. In the year QE took place it went up to 3.8% but in the following year there was deflation of -0.34% (figures from inflation A study of the consequence of the Japanese economy also indicates that QE had no impact on inflation. After the Japanese Government initiated QE in 2001, prices kept falling; that is, there was year-on deflation not inflation in the economy.

Here is the ECONOMIST discussing the consequences of the use of QE in Japan in the early years of the 21st century after all other economic policies had failed:

The Bank of Japan pioneered the process known as quantitative easing (QE) in 2001-06, when it massively boosted the reserves that commercial banks held at the central bank. Its verdict on how well QE worked then ought to interest policy-makers today. It will also discomfort them. For all that it propped up Japan’s creaking banking system; QE did not really improve the economy nor end the country’s deflationary mind-set (Loose Thinking: Japan’s sobering experience of quantitative easing, Oct. 17, 2009, p. 90).

The policy thinking behind quantitative easing is mistaken. Economists have a defective conception of what constitutes money. In their economic theory they have misleadingly given economic power to central bankers to control and manipulate the economy they just do not have along with the equally fallacious view that these very same bankers can determine or influence at will, short and long term interest rates.

The Socialist Alternative

Economists and central bankers just do not understand capitalism. In an uncertain market why should capitalists want to buy more plant and IT systems if there is no profitable outcome? Using their surplus cash to provide jobs for the unemployed is not what the capitalists are in business for. When the economic conditions improve and there is a prospect for making profit again companies will only be too willing to invest in production.

The economists, politicians and bankers have all lost the plot. They created an intellectually bankrupt utility theory of value in opposition to Marx’s scientific labour theory of value. They dropped the gold standard to release them from monetary discipline. They subscribed to the mystical belief that bankers could create credit at a stroke of a pen. And then they initiated decades of inflation while defining money until it had no meaning in the misguided twin beliefs that Banks controlled the economy through the interest rate mechanism and that politicians could guarantee no more booms and busts and full employment through a fiscal stimulus of the economy. It has left them floundering about for a cogent explanation of the current crisis and trade depression.

Trying to administer the anarchy of commodity production and exchange for profit is not a concern for Socialists or the working class. It is not our system. Capitalism is anarchic, unpredictable and socially unpleasant and can only be run in the interest of the capitalist class. Capitalism is a social system in which a minority privately own the means of production for their privilege and wealth. Capitalism is only about making a profit from exploiting the working class.

Defenders of capitalism are worried that the failure of bankers and politicians will lead to workers seeking alternatives to the profit system. A typical piece of economically illiterate journalism was the recent article, If capitalism does fail, the alternative is far worse by Alasdair Palmer (SUNDAY TELEGRAPH 8th October 2011).

Alasdair Palmer can only conceive of a state capitalist alternative to the failure of free market economics. This does not have to be the case. Workers can free themselves from class exploitation. They do not have to cut their throats from a misplaced pessimism about the social consequences of the anarchy of commodity production and exchange for profit. There is a revolutionary alternative. They can recognise the historically demonstrable fact that capitalism can never be run in their interests and organise consciously and politically to replace the profit system with Socialism; that is production and distribution just to meet social need.

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Object and Declaration of Principles


The establishment of a system of society based upon the common ownership and democratic control of the means and instruments for producing and distributing wealth by and in the interest of the whole community.

Declaration of Principles


1. That society as at present constituted is based upon the ownership of the means of living (ie land, factories, railways, etc.) by the capitalist or master class, and the consequent enslavement of the working class, by whose labour alone wealth is produced.

2. That in society, therefore, there is an antagonism of interests, manifesting itself as a class struggle, between those who possess but do not produce and those who produce but do not possess.

3.That this antagonism can be abolished only by the emancipation of the working class from the domination of the master class, by the conversion into common property of society of the means of production and distribution, and their democratic control by the whole people.

4. That as in the order of social evolution the working class is the last class to achieve its freedom, the emancipation of the working class will involve the emancipation of all mankind without distinction of race or sex.

5. That this emancipation must be the work of the working class itself.

6. That as the machinery of government, including the armed forces of the nation, exists only to conserve the monopoly by the capitalist class of the wealth taken from the workers, the working class must organise consciously and politically for the conquest of the powers of government, national and local, in order that this machinery, including these forces, may be converted from an instrument of oppression into the agent of emancipation and the overthrow of privilege, aristocratic and plutocratic.

7. That as all political parties are but the expression of class interests, and as the interest of the working class is diametrically opposed to the interests of all sections of the master class, the party seeking working class emancipation must be hostile to every other party.

8. The Socialist Party of Great Britain, therefore, enters the field of political action determined to wage war against all other political parties, whether alleged labour or avowedly capitalist, and calls upon the members of the working class of this country to muster under its banner to the end that a speedy termination may be wrought to the system which deprives them of the fruits of their labour, and that poverty may give place to comfort, privilege to equality, and slavery to freedom.